Glencore CEO Glasenberg warns on building too many mines

Ivan Glasenberg is calling on the new generation of mining CEOs to learn from their predecessors and stop building so many new mines just because they can.

“The big guys really screwed up,” Mr. Glasenberg, the CEO of Glencore International PLC, said on Monday in a presentation at a BMO Capital Markets conference in Florida.

“We’ve always been wanting to keep building and keep putting the cash which we generate into new assets. That’s what we’ve got to stop doing as a mining industry. We’ve got to learn about demand and supply.”

I hope CEOs have learnt their lesson. They built, they didn’t get the returns for their shareholders. It’s time to stop building

Mr. Glasenberg is one of the few CEOs of a major mining company that was not fired or otherwise replaced in the past year. Other seniors like Rio Tinto Ltd., BHP Billiton Ltd., Anglo American PLC and Barrick Gold Corp. announced changes at the top. In most cases, the shake-ups were due to poor stock performance that was a result of disappointing profits, overpriced acquisitions or both.

A common complaint about some of the senior miners is that they championed the so-called “build at any cost” strategy, in which they continued to greenlight new projects despite relatively flat commodity prices and uncertain demand. As a result, labour became increasingly scarce and capital costs soared across the industry.

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In Mr. Glasenberg’s view, the resulting increase in production has also taken a toll on metal prices. Major commodities including coking coal, aluminum, nickel and zinc are arguably in oversupply right now (though others such as copper and gold are not).

He hopes that the new CEOs will see where their predecessors went wrong and will focus on maximizing earnings instead of production.

“I hope CEOs have learned their lesson. They built [and] they didn’t get the returns for their shareholders. It’s time to stop building,” he said.

At least some of the new CEOs would agree. Barrick head Jamie Sokalsky came right out and said so last month: he wants to focus on profitability and has no plans to build new mines. The others have not been quite so forceful, but all of them are focused on reducing capital spending and driving greater returns for shareholders.

The global economy has given them little choice. With China slowing and the eurozone in recession, the outlook for commodity demand is not nearly as healthy as it appeared a couple of years ago. That has forced miners to delay or cancel many marginal projects, even if they wanted to build them.

Mr. Glasenberg is confident that a construction slowdown will drive higher prices, thus opening the door for more new projects. He said he is not bothered about investing too late, as this strategy should still drive better shareholder returns over the long run.

Glencore’s strategy has been driven by M&A. Since going public in 2011, the Baar, Switzerland-based company bought Viterra Inc. for $6.1-billion and agreed to buy Xstrata PLC for about US$34-billion. Mr. Glasenberg noted in his speech he prefers to buy second or third-tier brownfield projects instead of greenfield projects, as they can be turned into first-tier projects and can be built with less risk and in less time than greenfields.

BMO analyst Tony Robson wrote that Mr. Glasenberg made an “impassioned and well articulated” speech.